Israeli startups leap into China, yet the road to success is unchartered

In a meetup in late November at WeWork in southern Tel Aviv sponsored by Hyundai Cradle’s Israel branch, the first question to a panel on autonomous vehicles was about the impact of China on Israeli startups in this sector.

A year ago this would be a highly unlikely question to be asked in such a forum in Israel, but now that China exerts an outsize influence in this and other parts of the global economy, it is a novel issue that befuddles foreign startup founders in Israel and other places.

Hyundai Cradle, Hyundai Motor Company’s corporate venturing and open innovation arm, has offices in Silicon Valley and Israel. To date, it has invested in five Israeli startups, including AutoTalks, a chipset maker that helps reduce collisions on roadways and improve mobility, and Percepto, an intelligent multi-mission drone.

“China is the best place for scaling up technology,” Hagai Zyss, CEO of AutoTalks, said during the panel discussion. “In China, 90% market-ready is good enough whereas in Silicon Valley you need to be 100% ready with the product before taking the plunge,” he added.

In recent months, more Israeli deep tech startups, some with tens of millions of dollars in their coffers raised from Western and Asian venture capitalists and corporations, are setting up operations in major Chinese cities such as Beijing, Shanghai and Shenzhen. Their main path to growth and profitable exit remains the well-trodden one to Silicon Valley. Yet they are determined to crack the riddle that is the Chinese market, which to them is unchartered territory but one that can no longer be ignored.

The toughest challenge facing foreign entrepreneurs in China is how to navigate an unfamiliar business environment and build a significant customer base, which ultimately drives the startup’s company valuation. Electric vehicle (EV) manufacturing is one industry where the race is on.

According to EV-Volumes, a database that aggregates statistics on world sales of electric vehicle, more than 1 million EV’s will be sold in China this year, triple the amount in the US—a 114% year-on-year growth rate. This is augmented by the abundance of venture money, which according to CrunchBase has reached $93.8 billion as of October 2018—$2.2 billion more than the $91.6 posted in the US.

Not just the money

Staggering as these number may be, it is not the prospect of money alone that lures foreign founders. Hagai Zyss of AutoTalks has raised more than $70 million for his company in the last 18 months, with corporate and VC investors scrambling to hand out more cash. What tilts the balance in China’s favor in the eyes of Hagai and his peers, aside from the market size, are the accelerated time-to-market and high startup valuations.

Kobi Marenko is a serial entrepreneur, co-Founder and CEO of Arbe Robotics, a maker of high-resolution 4D imaging radar for autonomous vehicles. He has raised around $23 million for his company in three rounds since April 2017 mostly from Israeli VC’s. The Tel Aviv-headquartered company initially set up a sales and customer service presence in New Jersey, but Marenko says that “we have just opened an office in Beijing with an Israeli country manager to support around 10 relationships we have in China with car brands and auto part suppliers.”

Automotive is not the only sector that sees early adopting startups paying attention to China’s new dominance. In the first week of December Beijing-based Tomorrow Advancing Life announced that it was acquiring Israeli educational games startup Codemonkey for an estimated $20 million. Codemonkey has developed computer programming games for children, in which they collaboratively play and solve puzzles, create and share with friends.

In the digital space and e-commerce sector, where China is by far the largest player in the world, the numbers tell the story: The World Economic Forum reports that 40% of the world’s e-commerce transactions currently take place in China. Goldman Sachs figures show that in 2017 online gross merchandize value (GMV), a measure of the volume of e-commerce, reached RMB 7 trillion ($1 trillion), and is forecast to double in size by 2020.

Riskified, a Tel Aviv based provider of software-as-a-service (SaaS) fraud prevention solution for e-commerce transactions, which has raised $64 million from Israel’s leading VC funds, is redirecting some of its efforts. With most of the sales currently generated in the US, Riskified is now studying the digital landscape in China and is hiring one person to head up these activities.

These early adopters among foreign founders that are taking audacious leaps into China, but with few success cases to emulate, may discover that selling in large numbers there to be an elusive goal.